Everything you need to know about Investment Scams: The basics

Investment scams aren’t new. They date back to the days of traveling salesmen, and cold-calling brokers took them to new heights a few decades ago. The internet opened up a whole new world of possibilities, and investment scammers were only too happy to take advantage. But they are becoming more insidious, and they’re harder to spot, too. Social media has made it easier for scammers to deceive people, and smartphones have given them instant access to millions of potential victims.

So how do you recognize scams and protect yourself? What follows is a breakdown of the biggest and worst investment scams, along with some tips about how to spot them. We’ll also throw in some aftermath advice that will help you know what to do if you think you’ve been scammed.

Common Investment Scams

We’ll start with the internet and the impact it’s had on investment scams. It can be a great source of financial information and advice, but scammers know this, too, and they know how to set up a potential victim.

The tactic is simple. Present genuine advice to bait the trap, then add an invitation for a would-be victim to get in a “foolproof” investment.

This is done using a surprising array of financial vehicles. It includes penny stock scams, along with other low-level possibilities like micro-cap stocks. The advantage here for scammers is that these stocks often don’t have to be registered with the SEC, which makes it easier to sell them. They also can’t be looked up or traced, and some are even completely fictitious.

Online newsletters are another common scam vehicle. Most of the information may appear genuine, but they also often contain information to talk up a phony stock. Part of the game with this scam is trash-talking a competitive stock in a way that makes it seem like ordinary competitive marketing.

The SEC does try to combat this, but it’s a hard area to enforce. Technically, newsletter writers are required to disclose when they’re being paid for advice, but scammers will often ignore this law in order to gain an advantage.

Online bulletin boards are another possibility, and they’re often used in a way that’s analogous to newsletter scams. The fact that they contain posts from numerous people may make them seem safe, but there are almost always scammers lurking among the legitimate experts and advice-seekers.

These outliers often pump up a particular stock, then dump their shares to make a profit. Legitimate investors are left holding the bag, and in many cases they don’t even know they’ve been scammed.

Interest Rate Scams

With the Fed steadily hiking interest rates, this evergreen scam tactic is quickly making a comeback.

It’s often based on bait-and-switch tactics. The bait is the offer of a loan based on a great rate, but a small deposit is required to get that rate. Once the deposit clears, both the loan possibility and the rate vanish into thin air.

These kinds of scams surface regularly when interest rates go up, which is starting to happen as inflation rates rise. Given the current state of the economy. it seems safe to assume that they’ll be around for a while.

Investment Scams by the Numbers

If you fall for an investment scam and you think you don’t have plenty of company, you’re wrong. According to the Fraud Research Center, Americans get fleeced to the tune of $40-50 million annually, and almost 20 percent of the adult population will be victimized in a given year.

The demographics aren’t what you’d expect, either. When most people think of investment scams they think of the elderly, and there are certainly plenty of common scams that rope in the 65+ crowd.

But student loan scams have also become more common lately, so let’s take a deeper dive into how those work.

Student Loan Scams

The basis for these scams is political to some extent. With vague promises of massive loan forgiveness programs showing up in various mainstream news feeds, those promises play directly into the kinds of potential manipulation that scammers love.

The specific scam is based on the possibility that students won’t be saddled with debt any more. The premise is that they’ll have plenty of extra money to spend, and scammers are quick to present all kinds of options.

Other student loan scams are less subtle. They’ll present an offer for a fake student loan forgiveness program that’s actually a phishing scam, with identity theft as the real goal.

It takes time for students to figure out that they’ve been bilked, and when they do the scammers are often long gone. And so is the money of those who become victims.

Crypto-Based Investment Scams

It shouldn’t be surprising to anyone that cryptocurrency is playing a growing role in investment scams. It’s generally considered untraceable, after all, which makes it an ideal vehicle for scammers.

Another part of the appeal lies in the growing number of platforms. Bitcoin used to be the brand of choice in the crypto world, but now there are multiple other cryptocurrencies, all with various levels of legitimacy. Many are unrecognizable to ordinary would-be investors, making it easy for scammers to tout them as the next “sure thing.”

Still another major part of the lure of a cryptocurrency scam is the chance for investors to be in on something new. The sense of discovery heightens the appeal, and scammers capitalize on the ability to be a part of a new “secret club” to con victims out of their money.

Finally, the volatility of the crypto market makes it easy for scammers to sell a get-rich-quick scenario. Crypto investment in general has often been characterized by wild swings of 100 percent or more in both directions, and scammers use that volatility to promise a big payoff.

Investment Scams Tied to Romance

Now let’s look at one of the most lucrative and time-honored investment scams—the ones that are based on romance. Love and money are often joined at the hip, and so are romance-based investment scams.

The formula for these is as old as the hills, albeit with a modern twist. The handsome—or comely—financial professional shows up on a dating site, complete with an attractive photo, great banter and a friendly demeanor.

Once a bond gets formed, the banter turns into a seemingly innocuous request. The typical come-on is “I’ve got a great investment vehicle for you, and we can split the money.” Not surprisingly, the initial money request is small.

That changes quickly, however, depending on the nature of the scam and the scammer’s assessment of the would-be victim. The money requests get larger as the romantic “connection” grows, until the two are on near-equal footing.

The financial commitment of the victim then becomes part of the “happily ever after” romantic outcome. This continues until the scammer often suddenly disappears, or becomes disinterested after the initial score is made.

Advance Fee Scams

The just-described model for romantic scams also falls under the umbrella of what’s known in the industry as advance-fee fraud.

In a pure advance-fee scam, though, the language is more financially-oriented. Scammers start by mimicking the language and sales strategies of normal commercial activity. They tell potential victims that they need to pay upfront for an investment vehicle that actually doesn’t exist.

The initial offer often comes in the form of an email from an unknown source. If it makes it through your spam filter, that gives it an air of legitimacy that makes victims more likely to buy in.

Prevention and Follow-Up

So how do you keep from getting scammed? There’s no one foolproof method, but there are several tactics that can be effectively combined.

Start with the obvious. Don’t open emails from those who aren’t on your contact list, and be especially suspicious if they contain some kind of offer.

Beyond that, another general common sense rule applies. If something looks too good to be true, it usually is. Follow that advice with so-called experts, too, and ask plenty of probing questions if you’re going to bite on an offer.

If you do get scammed, keep in mind that you’re not alone. Few feelings are more helpless than being conned or victimized by a scammer, and the experience often comes with a sense of profound embarrassment. And that combination often makes victims reluctant to do the one thing they should.

Report it.

What good will that do? Even those who do report a scam to law enforcement or financial organizations tend to think they won’t get results, and to some extent their skepticism is justified.

The problem with this dynamic is that it’s only through reporting that many scams get stopped. Law enforcement needs information to stop a scam, and the organizations tracking those scams need data.

Think of it this way. If you were able to avoid a scam because you heard about it in advance, you were helped by those who got victimized and reported it to the authorities.

So document what happened to you thoroughly, then pay it forward. You might not get your money back, but you’ll increase your chances significantly, and you’ll help others from being victimized in the process.